OPEC

Why must the debt grow every year? To keep the debt-servitude paradigm going. To increase economic activity in a country operating in this type of system, you need to increase the level of credit and thus debt grows in tandem. This is self serving: if debt is the “fuel” to increase economic activity, interest payments will become larger and larger, until eventually it reaches a point where debt can no longer be increased. This point is known as the Minsky moment–when there is no net benefit to extra debt. So there we have it, in our “creditopia” world, if debt does not expand, the economy cannot grow and jobs cannot be created. In order to increase debt, foreigners have to continually finance the ever growing debt by purchasing government bonds and selling consumer products to the US. In turn, the US must increase the level of consumption, decrease savings, and eliminate the threat of any nation posing a risk to the US dollar hegemony. Is this a symbiotic or a parasitic relationship? Is is certainly a relationship that cannot grow forever. It poses an economic risk for ALL nations due to the interconnectedness of the global economy.

Enjoy your job in North Dakota while you can as in four years, those shale oil projects are no longer sustainable.

In a sharp turn around from the open, Italian and Spanish 10yr government bond yield spreads over German bunds trade approx. 10bps tighter on the day, this follows several market events this morning that have lifted sentiment. Firstly from a fixed income perspective, both Spain and Greece managed to sell more in their respective t-bill auctions than analysts were expecting and thus has eased concerns ahead of longer dated issuance from Spain this Thursday. In terms of other trigger points for today's risk on tone the December headline reading in the German ZEW survey was positive for the first time since May 2012 coming in at an impressive 6.9 M/M from previous -15.7 with the ZEW economists adding that Germany will not face a recession. Finally, reports overnight have suggested that Italian PM Monti could be wooed by Centrist groups which means that if he wanted too the technocrat PM could stand for elections next year albeit under a different ticket. As such yesterday's concerns over the Italian political scene have abated and the FTSE MIB and the IBEX 35 are out performing the core EU bourses. Looking ahead highlights from the US include trade balance, wholesale inventories and a USD 32bln 3yr note auction, however, volumes and price action may remain light ahead of the key FOMC decision on Wednesday.

1. Stay short AUD/NOK, opened at 5.90 on 03 Dec 2012, with a target of 5.00 and a stop on a close above 6.35, currently at 5.88.
2. Stay long risk (sell protection) on the CDX High Yield on-the-run index, opened at 506bp on 04 Dec 2012, with a spread target of 450 and a stop on a close above 550, currently at 516.
3. Go long the Commodity Carry Basket (Crude, Corn and Base), opened at 100 on 05 Dec 2012, with a target of 112 and a stop on a close below 94, currently at 100.

Right now the world produces more Oil than it consumes each day, and it has for the past 16 months, this trend will only get worse in 2013.

OPEC, in its World Oil Report, said there's an overall sense that developing shale oil and natural gas could start to redefine the global energy mix. In the United States, the cartel said shale natural gas production alone grew by more than 60 percent from 2010 to 2012.  For shale oil, supplies in the United States have already passed the 1 million barrel-per-day mark. Though shale reserves may ultimately be a game changer, said OPEC, outside the United States, the sector is in its infancy.

Exxon Mobil is no longer the world's number-one oil producer. As of yesterday, that title belongs to Putin Oil Corp – oh, whoops. We mean the title belongs to Rosneft, Russia's state-controlled oil company. With TNK-BP in its hands, Rosneft will be in charge of more than 4 million barrels of oil production a day. And who is in charge of Rosneft? None other than Vladimir Putin, Russia's resource-full president. Gazprom in control of Europe's gas, Rosneft in control of its oil. A red hand stretching out from Russia to strangle the supremacy of the West and pave the way for a new world order– one with Russia at the helm. It is not as far-fetched as it might seem – or as you might want it to be. Or imagine this: Russia could join OPEC.

Translation: Goldman is now buying Brent from its clients, aka Goldman 101.

Anyone wondering what the reason for today's dramatic gold price dump is, look no further than South Africa, where we learn that after nearly two months of endless strikes in the metals and mining complex, the country - the world's fifth largest producer of gold - is nowhere nearer to restoring its mining output. This of course means that less and less gold will hit the market. Which in centrally planned and regulated markets, means gold will collapse far more than the 1% so far, and likely close limit down, with Bernanke's compliment (don't worry that none of this makes logical sense: Heidelberg toner cartridge did a hostile take over of logic long, long ago).

It seems our recent re-introduction of the world to Robert Triffin has struck a note among a number of market participants. The gold-convertible U.S. dollar became the global reserve currency under the Bretton Woods monetary system, which lasted from 1944-1971. This arrangement ended because foreign central banks accumulated unsustainably large reserves of U.S. Treasuries, threatening price stability and the purchasing power of the dollar. Today, central banks are once again stockpiling massive Treasury reserves in an attempt to manage their currency values and gain advantages in export markets. We have, effectively, returned to Bretton Woods. The trouble is, as Guggenheim's Scott Minerd notes,  that the arrangement is as unsustainable today as it was during the middle of the last century. None of this should come as a surprise given the unorthodox growth of central bank balance sheets around the world. The collapse of Bretton Woods in 1971 caused a decade of economic malaise and negative real returns for financial assets. Can anyone afford to wait to find out whether this time will be different?

One of the more curious conspiracy theories that has appeared in the past 24 hours, or since yesterday's so far unexplained crude oil flash crash without a subsequent corresponding jump (those only happen in equities it appears), is that Saudi Arabia has decided to come to the aid of the Obama administration two months ahead of the election, and to pump enough crude into the system to offset the pricing in of the inevitable liquidity tsunami from the now global QEternity, or at least until such time as the election passes. Partially confirming this speculation was the FT's report that Saudi Arabia has offered its main customers in the US, Europe and Asia extra oil supplies through the end of the year, a sign the world’s largest exporter is worried about the impact of rising prices on the global economy. Reuters adds, citing a Gulf source that "We would like to see the price coming down and we are working to bring it down... The price now, we believe is high, and it's not supported by fundamentals at all. It's just speculation and geopolitics." "The majority of OPEC countries prefer around $100, including Saudi Arabia," he said, adding that $100 per barrel was "right now the ideal price for the majority of OPEC countries ... the majority is all except one or two." "We think the oil market is well balanced," the Gulf source added. This comes a day after fellow OPEC member Iran, whose output has been substantially curtailed in recent months as a result of a global embargo (with notable exemptions for key Iran clients India and China) made it clear that it would be happy with crude rising to $150 for obvious reasons. Obviously Iran is in the "minority" according to the Gulf source. And while the reasoning for Saudi Arabia to do all in its power to promote amicable relations with America's leadership is easily explainable, it is far less clear if Saudi Arabia can actually do much if anything to really prop up crude production, prop down the price of crude and gas at the pump, and support Obama's reelection chances.

Equities traded lower in Europe today as market participants continued to book profits after a rally to 13-month highs on growing concerns that even though the Constitutional Court in Germany will dismiss the injunction, it may enforce certain conditions. In addition to that, yesterday’s comments from Spain’s Rajoy who said that the new ECB backstop makes a bailout for his country less urgent. As a result, there is a risk that markets may scale back their expectations of an imminent full-scale bailout and in turn lead to another speculative attack on Spanish bonds. This, together with touted profit taking, saw the short-end in Spain and Italy come under pressure (2y Spanish yield up 8bps and 2y Italian yield up 7bps). In turn, this supported duration assets throughout the session. Looking elsewhere, the looming elections failed to deter investors from the latest DSL tap, which drew a record low yield. Going forward, the second half of the session will see the release of the latest Trade Balance data from the US, as well as the weekly API report. In addition to that, the US Treasury will sell USD 32bln in 3y notes.

• Germany says U.S. debt levels "much too high" (Reuters)
• Netanyahu ramps up Iran attack threat (Reuters)
• Burberry plummets by most ever, slashes guidance, rattles Luxury-Goods Industry as Revenue Growth (Bloomberg)
• FoxConn Again Faces Labor Issue on iPhones (NYT)
• Southern whites troubled by Romney's wealth, religion (Reuters)
• China's Xi not seen in public because of ailment (Reuters)
• Another California muni default: Oakdale, Calif., Restructuring Debt, Planning Rate Raise After Default (Bond Buyer)
• Spain's PM expects "reasonable" terms for any new aid (Reuters)
• Bernanke Proves Like No Other Fed Chairman on Joblessness (Bloomberg) - Ineffective like no other?
• John Lennon’s Island Goes on Sale as Irish Unpick Property Boom (Bloomberg)

Now that oil’s price revolution – a process that took ten years to complete – is self-evident, it is possible once again to start anew and ask: When will the next re-pricing phase begin? Most of the structural changes that carried oil from the old equilibrium price of $25 to the new equilibrium price of $100 (average of Brent and WTIC) unfolded in the 2002-2008 period. During that time, both the difficult realities of geology and a paradigm shift in awareness worked their way into the market, as a new tranche of oil resources, entirely different in cost and structure than the old oil resources, came online. The mismatch between the old price and the emergent price was resolved incrementally at first, and finally by a super-spike in 2008. However, once the dust settled on the ensuing global recession and financial crisis, oil then found its way to its new range between $90 and $110. Here, supply from a new set of resources and the continuance of less-elastic demand from the developing world have created moderate price stability. Prices above $90 are enough to bring on new supply, thus keeping production levels slightly flat. And yet those same prices roughly balance the continued decline of oil consumption in the OECD, which offsets the continued advance of consumption in the non-OECD. If oil prices can’t fall that much because of the cost of marginal supply and overall flat global production, and if oil prices can’t rise that much because of restrained Western economies, what set of factors will take the oil price outside of its current envelope?